Iii transaction costs particularly when viewed as a

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iii. Transaction costs , particularly when viewed as a combination of commission plus spread plus market impact costs, are well above U.S. levels in most foreign markets. This, of course, adversely affects return realization. iv. Political risk . v. Foreign currency risk , although to a great extent, this can be hedged. c.The asset-class performance data for this particular period reveal that non-U.S. dollar bonds provided a small incremental return advantage over U.S. dollar bonds, but at a considerably higher level of risk. Each category of fixed income assets outperformed the S&P 500 Index measure of U.S. equity results with regard to both risk and return, which is certainly an unexpected outcome. Within the equity area, non-U.S. stocks, represented by the EAFE Index, outperformed U.S. stocks by a considerable margin with only slightly more risk. In contrast to U.S. equities, this asset category performed as it should relative to fixed income assets, providing more return for the higher risk involved. Concerning the Account Performance Index, its position on the graph reveals an aggregate outcome that is superior to the sum of its component parts. To some extent, this is due to the beneficial effect on performance resulting from multi-market diversification and the differential covariances involved. In this case, the portfolio manager(s) (apparently) achieved an on-balance positive alpha, adding to total portfolio return by their actions. The addition of international (i.e., non-U.S.) securities to a portfolio that would otherwise have held only domestic (U.S.) securities clearly worked to the advantage of this fund over this time period. 25-4
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Chapter 25 - International Diversification 5. The return on the Canadian bond is equal to the sum of: coupon income + gain or loss from the premium or discount in the forward rate relative to the spot exchange rate + capital gain or loss on the bond. Over the six-month period, the return is: Coupon + forward premium/discount + capital gain = + - + %) 75 . 0 ( 2 % 50 . 7 Price change in % = 3.00% + % capital gain The expected semiannual return on the U.S. bond is 3.25%. Since the U.S. bond is selling at par and its yield is expected to remain unchanged, there is no expected capital gain or loss on the U.S. bond. Therefore, in order to provide the same return, the Canadian bond must provide a capital gain of 0.25% (i.e., 1/4 point relative to par value of 100) over and above any expected capital gain on the U.S. bond. 6. a.We exchange $1 million for foreign currency at the current exchange rate and sell forward the amount of foreign currency we will accumulate 90 days from now. For the yen investment, we initially receive: 1 million/0.0119 = ¥84.034 million Invest for 90 days to accumulate: ¥84.034 × [1 + (0.0252/4)] = ¥84.563 million (Note that we divide the quoted 90-day rate by 4 because quoted money market interest rates typically are annualized using simple interest, assuming a 360-day year.) If we sell this number of yen forward at the forward exchange rate of 0.0120¥//dollar, we will end up with: 84.563 million × 0.0120 = $1.0148 million The 90-day dollar interest rate is 1.48%.
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